Finance Jason Deign - 08/April/2022

Clarity is the key to confidence in voluntary carbon markets

Voluntary carbon offset schemes could significantly help attempts to cut greenhouse gas emissions if their effectiveness can be proven

Companies that cannot avoid emitting carbon are keen to fund ways of cutting their emissions by other means, although honest accounting is needed


GET OUT CLAUSE The effectiveness of carbon offsets is hard to quantify

CLEAR THINKING Greater clarity will be needed in the scaling up and securitisation of offset schemes

KEY QUOTE The problem is when carbon offsets are seen as a miracle solution that spares companies from having to reduce their carbon emissions


A Delta Air Lines jet rumbles down one of the five runways at Hartsfield–Jackson Atlanta International Airport in the United States. The aircraft is one of hundreds in the world’s second-largest commercial airline fleet, giving Delta a roughly 2% share of global aviation’s greenhouse gas emissions, which added up to 915 million tonnes of carbon dioxide equivalent in 2019.

However, Delta’s climate-concious passengers ought not to worry about the environmental impact these emissions cause, the company says. Since March 2020, Delta has claimed to be carbon neutral, even though almost all its aircraft still use the same aviation fuel as other airlines. Delta has achieved this through voluntary carbon offsetting, a concept that some people believe could be the key to combating climate change—although others view it with deep suspicion.

The idea behind carbon offsetting is simple: if you cannot get rid of your emissions directly—because there is no low-carbon alternative for your current choice of fuel, for instance—you can instead pay for something else that removes an equivalent amount. In Delta’s case, the airline committed more than $30 million in 2020 to offset its jet fuel emissions from March to December.

More than two-thirds of Delta’s expenditure went towards avoiding the release of carbon emissions elsewhere in the world, such as funding projects that work to prevent deforestation. Most of the rest was spent on ways to cut global carbon emissions, for instance by financing renewable energy projects. Less than 1% was spent on ways to directly take carbon out of the atmosphere, predominantly by planting trees.

“In the near term, we believe carbon offsets remain an important way to address climate change with the tools we have available now while we continue to seek solutions that will decarbonise aviation,” said Delta in a 2020 report. “Our current portfolio is majority reduction and avoidance offsets, but we intend to work towards increased investment in removals in future years.”

Voluntary carbon offset schemes such as Delta’s are separate from compliance markets such as the European Union Emissions Trading System, where authorities impose a cap on emissions and hand out permits polluters can trade. Such markets encourage companies to cut their emissions by reducing the total amount of permits allowed over time.

However, compliance markets only operate in some parts of the world, so voluntary offset schemes could fulfil a useful function in giving companies elsewhere a way of reducing global emissions. But only if the market into which they pay is effective in reducing emissions and if offsets were only used as a last resort in cases where there was no way to operate on a zero-carbon basis.

Alas, neither is necessarily the case. According to 2020 research by Finnish carbon offset provider Compensate, 91% of schemes do not meet stringent standards for additionality, permanence, reliability, social responsibility and immediacy.



Carbon reduction and avoidance measures, which are the most common targets in offset schemes, are notoriously hard to assess. Funding a solar farm, for instance, might well help reduce the amount of coal-fired power on a grid, but the project may well have been built anyway without the cash from offsets.

Charlie Langdale of Howden Group, an insurance broker that provides protection against offsets being invalidated during audits, says the way to avoid this kind of double accounting and ensure additionality is to look at compliance markets. “In those markets, there is a prescribed process, audit procedure and written guidance which people have to comply with in order to include a plot of land or farm or whatever in an offset scheme,” he says.

Alternatively, planting a forest will only remove carbon from the atmosphere if the trees are not cut down or burnt, which cannot be ensured as climate change worsens. “I see a huge amount of greenwashing because you’re not guaranteeing that the emissions that you’ve offset are really going to stay offset,” says Gerard Reid of Alexa Capital, a financial advisory firm.

The problem of making sure offsets stay offset is hardest to solve with so-called nature-based solutions, which covers tree planting and fostering other natural processes that theoretically sequester carbon. The effectiveness of these measures depends on natural systems staying as are today, which is hard to quantify and certify as global temperatures continue to rise.

As well as being inherently uncertain, nature-based solutions tend to be relatively cheap, which gives polluters a financial motive to invest in them instead of putting money into expensive yet more viable carbon reduction measures. Critics of carbon offset schemes worry that for some greenhouse gas polluters it may be cheaper to buy offsets than to cut emissions, which is simply the best way to avoid catastrophic climate change.

“The problem is when carbon offsets are seen as a miracle solution that spares companies from having to reduce their carbon emissions,” says Francisco Benedito of ClimateTrade, an offsetting services provider. “In order to meet the goals of the Paris Agreement, we need to first reduce our carbon footprint then offset what is impossible to abate.”

A core problem for carbon offsets, Benedito says, is that there is no consensus around what constitutes a “good” offset. Until people can trust the offset that they are paying for will really make a difference, both in reducing emissions and encouraging the payer to cut their carbon footprint, offsets will have a hard time living up to their full potential.

However, moves are afoot to address this issue through a governance body called the Integrity Council for the Voluntary Carbon Market, which is funded by a range of government bodies, non-profits, think tanks and finance institutions. In the third quarter of 2022, the Council will launch what it says is, “A definitive set of global threshold standards that will set a global benchmark for carbon credit quality.”

The standards will relate to a set of Core Carbon Principles (CCP) and an industry assessment framework. Private sector-led initiative the Taskforce on Scaling Voluntary Carbon Markets says CCP-compliant projects, “Will need to have a clear, measurable and direct impact in reducing carbon emissions and full environmental and social integrity.”

How this works in practice may involve looking at what techniques and technologies are used for carbon offsetting. If the aim is to take carbon out of the system and make sure it is removed for good, there are only a couple of bulletproof options.

One is to use a technology called direct air capture (DAC) that pulls carbon out of the atmosphere and then buries it in stable geological formations where, ideally, it will be trapped for millions of years.

Another, called bioenergy with carbon capture and storage (BECCS), sees plants absorb the carbon dioxide and are then burned to produce energy, capturing the emissions before they get back into the atmosphere. Under this approach, the emissions will again be stored in a way that prevents them from contributing to climate change in the foreseeable future. DAC and BECCS can pretty much be guaranteed to be more effective than nature-based solutions but are also more expensive.

By making these technologies the gold standard of carbon offset schemes, Paul Davies of the Coalition for Negative Emissions, a global membership body, hopes to attract investment that will drive down their cost. “With DAC, and alongside it carbon capture and storage, we’re hoping the price will come down,” he says.

Focusing offsets on DAC and BECCS does not mean nature-based solutions are out of the picture, Davies adds. To reach net-zero emissions, the Coalition for Negative Emissions estimates 78 million tonnes of carbon dioxide will need to be removed from the atmosphere every year by 2050.

The sheer scale of this task means all carbon removal mechanisms, including nature-based solutions, will be needed. However, to overcome the inherent uncertainty around nature-based solutions, Davies proposes that they should be heavily discounted for use in offset schemes.

“If I plant ten tonnes of trees, I say that’s worth one tonne of credit,” he explains. “If you then keep those ten tonnes going forever, fantastic—you massively over-achieve. If some of it does fall over or rot or die, then you’ve [still] achieved your objective.”

Attaching different values to different offset mechanisms based on their effectiveness would go a long way towards increasing confidence in offsets. It already happens in compliance markets such as the one in California, says Langdale at Howden.

The value of an offset need not only be linked to its decarbonisation potential. Because most developed countries have already included potential offset assets, such as forests and bogs, in their carbon accounting, offsetting schemes are likely to create a flow of cash towards developing nations.

These countries not only have an important role to play in mitigating climate change but also face other challenges that could be solved with money from offset programmes. Hence, in future, it may be that an offset linked to a project that also increases biodiversity could have greater value than one that simply reduces emissions.

“This binary thing about carbon is obviously important to get right,” says Langdale, “but I think the quality of the offset will be dependent on other things going forward.”

Ensuring quality is not the only thing that needs to be improved in the carbon offsets world, however. Another problem for voluntary offset markets is traceability. You may pay for an offset to be used in a carbon reduction or removal project, but how do you know for certain that the money ends up there?

To overcome this point of uncertainty, ClimateTrade and others are using blockchain technology to track carbon offset transactions. “There isn’t enough transparency in carbon markets, which makes some people and companies worry that the money they spend to offset their carbon footprint doesn’t end up in the hands of climate mitigation projects,” Benedito says. “This is relatively easy to solve with digitisation.”

ClimateTrade has recently carried out a proof of concept with the Madrid stock exchange to monitor, report on and verify carbon credits. “This type of innovation increases trust and efficiency in carbon offsetting transactions, which in turn will make possible the scalability we need to fight climate change,” says Benedito.

Scalability is vitally important to the future of carbon offsetting—if nobody takes part in offset schemes then they will have no chance of making an impact on climate change. Achieving scale was one of the main objectives behind the creation of the Taskforce on Scaling Voluntary Carbon Markets, which includes members from organisations as diverse as BlackRock, Goldman Sachs, Nestlé, Shell and Delta Air Lines.

In 2020, Taskforce co-founder Mark Carney, a former governor of the Bank of England, said the global voluntary offsets market should ideally be worth between $50 billion and $100 billion a year. Last year, it was worth around $300 million.

To grow as Carney envisions, offset schemes may need to evolve in sophistication and offer products like those found in financial markets. One idea is to package offsets into securities that can be traded between investors.

Securitisation works by combining assets into a single pot of value and then dividing that value up into smaller pieces that can be traded easily. The concept has already been tried with carbon permits from compliance markets.

London-based Tramontana Asset Management has completed $5 billion in deals using carbon permit-backed securities. “There’s no doubt securitisation makes sense” for voluntary markets, says Reid at Alexa Capital.

“What securitisation does is it allows you to structure products to suit the needs of different capital groups,” he says. “It brings more capital in.”

However, securitisation could also be risky if the assets involved are not first categorised in terms of their value, as was demonstrated in the sub-prime mortgage crisis from 2007 to 2010. “Big financial institutions bought loads of mortgage assets, put them in a bucket, chopped them up and sold them to people,” says Lincoln Payton of Cleartrace, an emissions auditing platform provider.

“The problem was what was in the bucket. The mortgages were rubbish. You’ve got to do a very good job of the criteria for what goes in the bucket.”

The global threshold standards due out from the Integrity Council for the Voluntary Carbon Market this year should go a long way towards establishing those criteria. “To stay within the Paris Agreement target of less than 1.5 degrees [Celsius] of global warming will require not only huge reductions in emissions in the next decade but also substantial negative emissions,” says the Coalition for Negative Emissions.

“Private sector participation in negative emissions markets will help provide the funding to ramp up the infrastructure needed to deliver permanent carbon removals,” it adds.

This idea of a self-destructing market is not one that is preoccupying experts at present. The pressing issue, for now, is to iron out the bugs in the voluntary offset market so it can prove it is worth the effort in the first place, says Reid at Alexa Capital.

The activity taking place could develop into a thriving market for carbon offsets. Unlike most markets, however, carbon offset opportunities will come with a sell-by date. To really be considered successful, voluntary offsets will have to encourage a rapid migration to low-carbon energy systems. The ultimate objective is that companies will not need to offset carbon because they have reached net-zero emissions.

This need not mean offset schemes will disappear around 2050, however. The climate emergency is just one of several environmental and social crises facing humanity in the coming decades. As today’s voluntary offset market matures and the quality of offsets becomes more closely linked to the environmental benefits they offer, schemes can be adapted to cater for other outcomes.

This direction of travel is already evident in Langdale’s proposal to attach offset value to non-carbon related measures, such as biodiversity or social impact. “The carbon offset market is going to change as people’s needs change,” Langdale predicts. “It’s already happening now.”

Langdale says it is important not to let early missteps in offset markets cloud this long-term potential to funnel investment into areas where it is needed most. “If you take one step back, the idea that the world is going to get to any sort of net-zero position without any effort to grow trees or change the tillage of the land is never going to happen,” he says. “Your problem is it’s the Wild West out there.”

“[There are] probably thousands of people operating extremely bogus schemes, just to make money,” he says.

However, that is to be expected in nascent markets before professional standards and regulations are established. The real problem is if the market fails to take off because there are some incredibly worthwhile projects out there, Langdale says. •


TEXT Jason Deign


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